LateMechanic
No bio...
User ID: 1841
LateMechanic
10mo ago
Ill note that you still havent explained why too much inflation is bad, or how we would know what "too much" is.
I assume you're not asking for the various downsides of inflation in general and why people find it annoying when it's above some small amount like 1-2%? My original statement was that people should have the properly oriented mindset, where the problem of 'too much government debt' is along the lines of 'too much of a good thing'. The 'good thing' here is the money in the private sector, not inflation, if that was the confusion. This is all in contrast to most peoples' gut notion that "deficit" and "debt" sound negative and bad and worth minimizing on their own.
I agree that the taxes give value to the IOUs, but I dont think the made up unit gives you all that much long-term
You don't think the US making up their own 'dollar' unit of measurement is too important? You must be on some kind of galactic time scale here for what long term means. This is surely one of the most important things about being a sovereign nation, creating and issuing your own currency.
Unless you can somehow inflate above expectations indefinitely, in the long term you need to tax back what you borrowed plus interest in real terms.
Again, maybe I'm not thinking long term enough. But in the US, we went into millions, then billions, now trillions. Should we find the tens of trillions a special number, such that we wouldn't expect to see quadrillions? When and why would they ever need to 'tax back' this amount? The IOUs just roll over indefinitely.
There is no reason to borrow unless your position as the government gives you investment opportunities above market returns, youd just pay interest for no good reason.
Yeah once you recognize that all money is just transferable credit, you will notice that there is basically no economic difference between central bank reserves and treasury securities. So rather than one being 'money' and the other being 'borrowing', they are actually not 'borrowing' at all. They are just creating money in different forms. This fact has dawned on people like Larry Summers a decade after central bank reserves started paying interest just like treasury securities.
As for paying interest, it's purely a policy choice to pay anything other than 0% on any of these IOUs. It's a government subsidy to savers: they will give you more money for having money. There are various macroeconomic effects for any chosen rate. Currently the policymakers in charge think choosing to pay a higher interest rate is on balance more constrictive than stimulative, and think that low rates are on balance more stimulative.
LateMechanic
10mo ago
My thinking is not confused because I admit that money and treasuries are (consolidated) government liabilities, both of which need backing and ability to repay. People get confused with “fiat money” and think that it doesn’t require any backing. But the value of fiat money today depends on the expectations of its value in the future; that value depends on the demand and supply of money then.
I don't know what you would mean by "backing" in this context. The treasury issues IOUs that pay interest (bonds/bills/etc), and they make those interest payments by issuing more of the same IOUs in the future: they indefinitely roll over. The central bank issues IOUs that pay interest (reserves), and they make those interest payments by issuing more of the same IOUs in the future: it indefinitely rolls over. There is no promised future real 'value', it is what it is, and if there's inflation, so be it (other than the inflation-indexed bonds). And the only thing any of these government IOUs can be redeemed for when returned to their issuer is tax relief (or you can freely swap them for other different types of government IOUs).
If the federal reserve has no assets, then it cannot react to a lower demand for money by withdrawing the money from circulation so the value of money would be lower.
They are the monopoly issuer of the currency, and thus can either control price or quantity. There was a bit of a monetarist experiment with Volcker where they tried to control quantity and let price float, but that just caused the price (interest rate) to keep ratcheting up, because commercial bank lending creates deposits endogenously. They have since recognized that they just have to fix price and let quantity float, to run the system properly. So they just set the interest rate and do not care about 'demand for money' - it's infinitely available at some price. We're simply talking about numbers in account balances.
Finally, repayment in real terms is the concern. Inflation is default.
Whose concern? The government doesn't care. And no one else's opinion matters. They are not beholden to the market. If inflation ticks up, that is definitely not the same as defaulting on the debt. We still need the government's IOUs to pay taxes, so they will perpetually be valuable to that extent.
No serious monetary economist will ever tell you that a central bank has no meaningful budget constraint
Not sure what you mean by a central bank budget constraint. They have various expenses each year, but any preparation of a formal budget is to make their case to congress that they're behaving well and shouldn't be slapped on the wrist. It's not an economic constraint. They tend to end up in profit every year and just dump that amount into the treasury's account.
The usefulness of money allows you to get some value without any backing (for a different example of that look at Bitcoin).
Bitcoin has no issuer offering a redemption value, and thus is a commodity rather than money. As an economic instrument, the fair value is $0. Any valuation above that might be a small amount for the utility of making transactions (would work if each btc were 1 cent or something), and otherwise just speculative (don't get caught holding the bag).
If you're saying that bitcoin has no 'backing', but US dollars have 'backing', maybe you're using that term for what I'm calling IOU 'redemption'? (returning an IOU to its issuer, to get what is 'owed')
LateMechanic
10mo ago
In which area do you see them being hampered by the public debt? The usual story goes that ever since the 90s crash, Japan had mostly been unable to generate any inflation, in their constant fight against dipping into deflation. The only exception being the 2022 inflation where basically every currency got the same tick up.
As far as how this coincides with the story about government debt corresponding to monetary savings desire, a plausible story is that the Japanese people don't trust the stock market after the crash, and thus most of their asset allocation is monetary (cash/bonds), especially as an aging society trying to save for retirement. So for the japanese government to really juice the economy with stimulus, it would have to try a lot harder with a huge deficit (instead they often balked and pulled back multiple times over the decades).
LateMechanic
10mo ago
What if people refuse to use your currency to trade goods and services? What if they tell you to fuck off when you ask them to pay you your own fun bucks?
This entire scenario is specifically about what happens when your power to enforce the privilege of exchanging debt for ressources ends.
Money is debt. So that would be inflation, which was definitely covered from the start. That is absolutely the relevant constraint on government deficit spending.
As far as the exchange rate goes: in the very worst case scenario of your exchange rate suffering, you can always at least import as much as you export. That's true whether you even have your own currency or not. But if you have a currency that foreigners are willing to save in (a world 'reserve currency', which basically all currencies are to different degrees), that just allows you the luxury of importing even more than you export (not necessary, but can be nice, although then your exporter businesses might start bitching about your country's 'trade deficit', so it's not all roses).
What happens when US treasuries are no longer viewed as the most risk free investment vehicle in the world and are replaced by something else and demand craters?
As I tried explaining procedurally above, it doesn't matter a single iota whether there's any market demand for treasuries. That's the charade part of it. The government effectively is just printing money as they deficit spend, and they always have been. They print the money, they set how much interest money pays (if any), and we have to get the government's money regardless of anything, in order to pay taxes.
If the king wants something done, he levies a tax on the subjects. Then he prints up some tally sticks, and pays them out to people to do the thing. Then they pay their tax, and he burns the tally sticks. Same with colonial american paper money: levy a tax, print up some stacks, get the work done, then shred the money as it gets paid back in taxes.
LateMechanic
10mo ago
Well the private sector definitely creates money and real wealth as well, so it's not a competition for any kind of limited quantity of financing. But it does so pro-cyclically: when times are good there's lending & investments everywhere, but everyone clams up when times are bad. The government can be the counter-cyclical engine, stopping the paradox of thrift.
If you would have otherwise had high unemployment, then creating money and paying those unemployed people to dig holes is at least better than letting them atrophy away, in terms of "damage done", because at least they go on to spend that money and generate more demand. But yeah it would always be a better idea to put people to work generating some kind of base-level valued output (goods/services). Ideally the government catches people at the bottom unemployment end, and they can as quickly as possible transfer back into the private sector to make more money and do something valuable.
LateMechanic
10mo ago
Germany lost a war and a ton of productive capacity, and had to pay war debts in foreign currencies. The other one about 'productive' was Zimbabwe destroying their own real economy with land reforms.
Don't remember what Argentina's deal was, didn't they keep borrowing in USD and do multiple voluntary peso defaults? Or recently they mistakenly were causing inflation by increasing their interest rate which was supposed to fight inflation, until they finally realized that and cut the interest rate which cut the inflation proportionally? Getting the gas & brake pedals confused is a rough time.
Anyway none of these were some policymakers learning the forbidden dark arts of 'oh the only constraint on fiat currency deficit spending is inflation, not insolvency? That doesn't sound bad, let's spend with abandon!'
I thought the 70s stagflation had put to rest the silly notion that high inflation equals low unemployment.
Well the premise would be: if prices are going up because 'people just have so much money they can't spend it fast enough', businesses would be booming and would be desperate to hire anyone that's available. But yeah, the '70s shows that if inflation is 'cost-push', ie caused on the supply side by something like an oil embargo out of nowhere, then it doesn't matter if you try to wreck the economy (as volcker tried), those prices may not be tamed by more unemployment slack. May need to deregulate natural gas in that kind of instance, to get costs back down.
LateMechanic
10mo ago
"It says here in this history book that luckily, the good guys have won every single time. What are the odds?”
Not sure you're following the point, that was saying that we have a goofy system precisely because different people have been trading off who wins & loses all the time. Especially in the 19th century the winners didn't exactly know what they were doing (constant boom & bust cycles with many severe depressions).
"Primary dealers" of monopoly money can surely not fail in delivering it to the US government, but how exactly does that translate into food rations for GI?
The government prints up some IOUs called treasury securities, and swaps them for some other government IOUs called central bank reserves, in a primary dealer auction completely unencumbered by "people choosing to buy debt". Then they use those IOUs (widely called 'money') to spend and/or give to people out in the economy, who are willing to trade goods & services for those IOUs. These government IOUs are valuable because they're the only way to settle your taxes that the government declared that you owe.
If that sounded like gibberish to you, well I already said most people don't understand the monetary system and never learned about it. If you think there's "a" world reserve currency conferring special status to a single country, that does explain where you're at, but the basic logic I just laid out also applies to other countries that issue their own currency.
LateMechanic
10mo ago
The point of me saying this was that in that situation you should put more effort on justification.
Yep fair enough, my initial 2nd paragraph was kind of declaring things outside the point of the rest of it. That was trying to punch up what people might 'know' which I think are incontrovertible, without going into subjective policy implications.
None of this describes an actual problem with inflation. It says that inflation will automatically regulate away any excess borrowings. Why then not set taxes to 0, and just let the inflation run its course?
Having some amount of taxes is what gives the currency an initial anchor value. Those taxes being levied broadly and reoccurring every year is what makes the money universally accepted and used even in the private economy. The currency is an IOU where the only thing 'owed' upon redemption is tax relief. If you levy no taxes, then inflation definitely will regulate the value automatically to the desired savings amount of 0 (give or take some inertia).
Is there any reason this is unique to the government? Or is my deficit also literally the same thing as rest-of-the-economy surplus? Because if it is, then it seems noone else should have objections to me borrowing indefinitely, either - it just makes you better of!
The only thing unique to government is the ability to levy taxes (backed up by force). That's what allows them to indefinitely print up IOUs that promise to pay nothing but an abstract amount of value in a unit of measurement they make up, and people will still line up to earn those IOUs (working in the army or wherever).
The generalized logic is: "you will always value your creditor's own debt". Because you can cancel out the debts with each other. The government can decree that it's a universal creditor to everyone (everyone owes taxes, abstract amounts of value payable in nothing). Thus enabling it to actually simultaneously be a universal debtor to everyone (issuing IOUs far exceeding the tax liabilities, if people are willing to save some for a rainy day).
You can write any number of IOUs that say "I owe the bearer of this note 1 apple", and use that new money to pay for things. Maybe only people in your neighborhood will accept it (also helps if they know you have an apple tree in your yard, and that there aren't too many outstanding notes to enable a run on your apples). If you write "I owe the bearer of this note $1", then some people (particularly banks) may accept it as valuable if they trust your creditworthiness. Your deficit is indeed definitely everyone else's surplus, if splitting the economy into those 2 sectors is useful to any analysis. So we (in the non-Lykurg sector of the economy) do benefit. The only problem is you run out of creditworthiness before we get very stimulated.
Why would they not want more? You demand that I explain why we would ever want non-government surplus to be less, but now you just assert that it will be the case.
Well, would you be happy holding millions/billions in checking/saving/bond accounts, or would you be tempted at some point to start buying stocks, yachts, and islands instead? It seems that most people tend to have savings targets to hit, after which they feel more free to spend any excess income. And their preferred asset allocation of savings maxes out at some desired amount of monetary savings.
But indeed, the government deficit could certainly be eleventy zillion dollars, if it were to end up in someone's account that has an infinite savings desire who wouldn't touch it. In the MV=PQ identity, that would be money increasing but velocity falling off a cliff, causing no effect on output or price level.
And I didn't say that there's no reason to want to shrink the government deficit, just that it does take an explanation. I could say that I do want to shrink the non-government surplus in hypothetical situations, if we're having obnoxious levels of inflation, maybe caused by too much government spending being indexed against the price level (causing a positive feedback loop that prevents automatic stabilization).
Finally, we indeed have basically never had much demand-pull inflation in the modern era of democracies with proper central banks using fiat currency (since the early 20th century at least). The bouts of inflation are usually better explained as cost-push, often from energy price shocks. The central bankers take credit for being wizards and steering the economies well, but it's probably those fiscal automatic stabilizers doing the work.
LateMechanic
11mo ago
Yet issuing more Treasuries and then wasting the proceeds is not sustainable.
But what are the 'proceeds' in your formulation? They issue a government liability that pays the policy rate, swap it for a different government liability that pays the policy rate (central bank reserves), and then spend it. There is no difference between reserves and treasuries, so calling one 'money' and calling the other 'debt that requires backing and an ability to repay' is only serving to confuse your thinking.
It's akin to printing up a new $5 bill, then exchanging it for quarters because that's what the arcade takes. No more or less money in any form. They can print as many central bank reserves or treasury securities as they want, so 'repayment' is a non issue. Inflation is the only relevant concern.
LateMechanic
11mo ago
What will inevitably happen is that some lefty will use this bullshit to do what they always do and spend with abandon until collapse.
That seems to be the driving fear, although we've never seen it happen in a productive democracy. In the real world, regular people seem to hate inflation so much that we almost always err on the other side: too much unemployment from taxes being too high.
It will not be like greece, who was bailed out by the nordic german taxpayer (while being decried as evil austerites), more like venezuela.
It would definitely be weird if the US ended up looking like a country that gave up their own currency or a country that relied on a single export while borrowing in a foreign currency they didn't control.
LateMechanic
11mo ago
Private savings don't have to be in T-Bills. To the extent the market is flooded with them, they crowd out private investment and savings in private instruments.
There's no crowding out there, it's just a price effect. The government sets the risk-free rate, and others price risk premiums on top of that. Finance is infinitely available: price not quantity.
So even if some amount of T-bill generation each year is actually good, it would be best achieved by funding courts and police and setting taxes near to zero.
That's exactly right, that's why we fight (politically) for our preferred outcomes. It's just a mistake to say the deficit has anything to do with the size of government or what we prioritize doing in the public sector. The size of the government deficit & debt have to do with the savings desires of the populace. So it's just the wrong target to look at.
LateMechanic
11mo ago
MMT is mainly about describing how fiscal policy and money itself works, and it apparently has been essentially the same throughout human history. The word 'modern' was a joke from a Keynes quote about "the past 4000 years, at least". Mesopotamian temple accounts, European tally-sticks, various stamped coins, etc. Always money being transferable credit, and dominated by credit from the authority of the day. It's how you would bootstrap a monetary economy into existence, whether you're talking about a hippie commune, a Lost desert island situation, or a new nation, without relying on any circular reasoning "lets call this seashell money: I value it, because someone else will value it, because someone else...". Using the authority's power of taxation (and power to punish/expel those who don't pay) to give value to money is an imposition, but it appears to be the least barbaric method for organizing society we've come up with so far.
Monetary policy as the business of setting interest rates, isn't of that much concern to me. I think they've landed on basically sane goals of desiring slight inflation over time, and a policy regime of simply paying interest on reserves to set the base interest rate (much better than the pre-2008 system of open market operations). I would like to see them just set the interest rate at 0-1% and leave it there forever, as I don't think there's good evidence that it controls inflation or the economy like they wish it did, and I think interest payments are maybe some of the worst government spending.
But have you sit down for a second and asked yourself if that's a good thing that it works like that or not?
I was basically a libertarian before I learned MMT and became a normie, although I never really had that core furious uncomfortability that someone else's decisions can affect 'my money', which seems to really animate some people in these questions you're raising.
The whole current system especially in the US is downstream of hundreds of years of business interests, ideological libertarians, and others clashing over precisely the kind of political questions you listed. The core economic logic is actually extremely simple, but there are a million self-imposed constraints, strange terminology, and extra steps between it all (leftover from the gold-standard era mainly, but it's been through a lot).
And most importantly, what happens to all this the day that people stop buying US debt no questions asked?
It's almost purely a charade that they pretend the market has a role in buying US debt. 'Almost', because they currently do like to take the temperature of market predictions on longer-term securities, and let those rates up the yield curve fluctuate with market sentiment. It's a self-imposed constraint that the treasury and central bank are separated, a self-imposed constraint that the treasury can't go into infinite overdraft on their account, a self-imposed constraint that they can't directly swap liabilities with each other, etc. After WW2 when they re-imposed that last constraint, the Fed chair Eccles told congress exactly that the market plays no real role and that it was a charade, but they re-imposed the pretend restriction anyway for the optics.
The current system of maneuvering around the laws in the US is that the central bank contracts commercial banks as 'primary dealers' who have an obligation to make sure every treasury bond issuance goes off perfectly without a hitch at the chosen policy rate. No bond vigilantes get a say in the process.
MMT is propably not a popular position here.
That is definitely the case, but I would be surprised if anyone could do the t-accounts for various government & banking accounting operations and actually put the liabilities & assets on the correct sides, etc. Even most economists mess it up completely. It's just not something most people learn or care about. My guess was definitely about US officials and how their actions may be explained by their private knowledge, rather than an estimation about our forum members' beliefs.
The rest is the same thing in different words. And as for that.
Identities are a basic check to make sure you're not getting something totally wrong. If you think the government deficit is a bad thing that should be reduced, you have to explain why you think that of the non-government surplus as well. It is quite literally the same thing. As Kelton said in that presentation, people goof up on this all the time. The WSJ in the late clinton years proudly proclaiming in one column "isn't this wonderful? This is the longest sustained budget surplus since 1929!" while the next column over is hand-wringing "this is very worrying, the private sector savings are plummeting!".
Why is inflation correcting it?
When collectively the private sector has more monetary savings than we want, we will value money less and increasingly try to spend it away - the hot potato effect. Prices will get bid up high enough from this economic activity (falling value of a dollar) until we have the correct/desired amount of savings again. Or before that, the increased economic activity will cause the excess monetary savings to get shed off in increased tax payments (monetary destruction, IOUs returning to their issuer).
So taxes being set at rates instead of flat amounts is therefore one of our main automatic stabilizer policies (the other being safety net spending): the government deficit automatically shrinks & grows depending on the state of the economy. Demand-pull inflation is the final relief valve after that, re-valuing money downward until we have the amount we want.
LateMechanic
11mo ago
I've said this before, but I'm pretty sure a lot of members of congress have learned at least some MMT stuff about banking & government finance accounting. They pretty much all still use the deficit, debt, and fear of large numbers as rhetorical weapons against their opponents when out of power. But we seem to see fewer people than ever signing up for the mistaken sucker play of being in power and actually crashing the economy with austerity. Maybe more senators than house members understand the reality; surely more democrats than republicans have been incentivized; and definitely more congressional aides and rank&file treasury/fed people know how the financial plumbing works compared to elected & appointed officials (but in the US in particular, these types seem to effectively be able to get the word out to stop politicians from wrecking things usually). This time around, Trump even potentially had Elon as a perfect fall guy to take any blame, if Trump actually wanted to cut the deficit (luckily he didn't).
To be economically literate, one would have to know that saying the government deficit should be cut is identical to saying the non-government surplus should be cut. Or that the government's debt is not "our" debt, it's our asset: the government is just a balance sheet entity we made up, which we use to emit IOUs that we (the actual people) get to hold & use. It's much more akin to a scorekeeper, tracking the points everyone has. The national debt is essentially the net money supply, and that money is being created by running a deficit (constantly for hundreds of years, with no reason to stop if the people keep wanting to accumulate monetary savings). Government deficit & debt are good things, and the only problem is along the lines of 'too much of a good thing' (inflation, which is the self-correction mechanism).
I think MMT was especially catching on amongst politicians around like 2018-2019. The inflation of 2022 probably put it on the backburner for awhile. But even back in 2012, here they are talking about how a load of congress members understand things but just can't say anything publicly: https://youtube.com/watch?v=ba8XdDqZ-Jg&t=1h4m25s
Moderator: Can you answer the question of why does the system not adopt what you're saying?
Mosler: Yeah so last year we had the debt ceiling drama. Remember that last summer? And right after the State of the Union, Paul Ryan got up and said 'Look the US could be the next Greece, we're going to be on our knees to the IMF, interest rates are going to spike, we might get downgraded, we might default, we have to take $1 trillion out of the deficit, and we're not going to vote for the debt ceiling increase unless we do that'. And Obama actually agreed! The president agreed, and he had a plan to take 6 trillion out, but they didn't like what each other was doing, they got right down to the wire, they kicked the can down the road with a compromise... Interest rates had gone up in anticipation of something terrible happening, the stock market was crashing, and we got downgraded by S&P... And what happened? Okay, interest rates went down instead of up. 3-month treasury bills were going through at 0%. Everybody was like 'what's going on, how is this possible?' No move on the deficit, we're up over 16 trillion...and, you know this is supposed to be the end of the world. And then suddenly it started sort of coming out: you had Alan Greenspan come out and say 'well you know, we print our own money'. And Warren Buffett came on and said 'we're 4A not 3A, because the Federal Reserve prints the money'.
So I compare this to the War of 1812 and the Battle of New Orleans. The Battle of New Orleans was fought after the war was over. So what's happened is that moment when they came out realized that we weren't going to be the next Greece...okay the US was not going to be at its knees, that deficits don't drive interest rates up (and there's absolutely no reason to think they would when you understand monetary operations--they never do)... the war was over! Okay, we had won the war. The reason for deficit reduction was gone. It disappeared. All the reasons that, you know, Ryan and Obama..."we've run out of money", all these things were over! Okay, but they kept fighting the war anyway! And it's kind of the strangest thing. They just started pushing ahead with, 'okay, now we got to do it towards the end of the year...'. And nobody talked about Greece for a while, and then now all of a sudden in the last few months you're starting to hear Greece sneak into it again. Okay, that war is over, you're right, it should be over! Okay we know that deficits don't cause any default risks, they don't cause interest rates to go up, they don't cause any of that. Now, they might cause inflation, if we overspend. But let me say two things on that.
Japan's been trying to inflate as hard as it can for 20 years, and hasn't managed to get out of deflation. The Federal Reserve has been trying to inflate with everything it's got, every trick in the book, every tool it can imagine, for four years and hasn't done it, it's utterly failed. It's not that easy. I've been writing for years that central banks cannot cause inflation no matter what they do. And I think we've seen that proven out. So #1, inflation is not that easy. (The causes of these other things were all special circumstances, all the hyperinflations I won't get into that). But if there is any reason to think that we do need deficit reduction, that we should cut spending or raise taxes, it has to be inflation. Because none of the other things are a factor. So let's look at our inflation forecast: there isn't one analyst out there who has a reputation to defend that's forecasting any kind of inflation. The treasury index bonds, 30-years, are forecasting very very low inflation. There's not a single inflation forecast out there.
So I talked to representative, what's his name, Hollen--he's on the deficit reduction committee from Virginia, he's a progressive Democrat. I said "okay the war is over, why are you pushing for cuts in social security, cuts in Medicare? Isn't the burden of proof on the other side to tell you that we have to cut or else is going to be inflation? Maybe they have to do a little research, and prove to you that there could could be inflation and therefore we have to cut Social Security and Medicare? Because there's certainly no forecast out there. Why are you just voluntarily (the left, the Progressive Democrats) out there proposing these cuts?" He goes, "well, it's a pretty large number and I think we need to do something about it." It's like 'What??'
Okay there's something very wrong with the political process. And I think what's happened is they become victims of their own propaganda. They've gotten it so instilled in people that we have to do something about the deficit, they can't even begin to talk otherwise. Even though they know the war is over, even though they know they've lost any possible reason for it, even though they know the burden of proof is on the other side now to show that spending needs to be cut or taxes need to be raised for some reason... The polls show and the reactions show that if they come out and aren't for deficit reduction, they get laughed off the stage and they they lose their spot. So this is the the Battle of New Orleans being fought after the war is over because people don't realize the war is over. So even though the policy members might know that, they're dealing with a population that doesn't know...and is just an economic disaster, a real tragedy.
Let me say one more thing about taxes, if I can, and the size of government because I want to make this entirely apolitical (which it should be). The size of government is a political question. How many teachers do we want in the classrooms, how many soldiers do we want in the army -- if you take too many there'll be nobody left to grow the food and we're going to starve, if you take too few we're going to lose the war. These are all political decisions of what resources we want to move from the private sector to the public sector. And you'll have differences of opinion: some people think we need more government, some people think we want less government. But once we've settled politically on the right size government, then there is an appropriate level of taxes that allows the right size deficit, so we have the right amount of savings, to offset our pension needs and stay at full employment. So given that the size of the government is a political decision that shouldn't be based on whether the economy is good or bad -- 'we need a a legal system, how many judges and clerks do we need?' Well you know if there's a 10year wait, maybe we need more. If they're calling you up asking you to see 'why don't you go out and sue somebody, we have people waiting around to have a trial', maybe we've got too many of them. See, you've got to come up with the right size legal system and everything else.
But once you've done that, taxes are the thermostat on the wall. If the economy is ice cold and unemployment's high: you're taking too much money out for the size government we have, and you need lower taxes for that size government. If on the other hand it's overheating, there's too much spending, and prices are going up too fast, and unemployment is too low (whatever that means): then taxes have to be raised because for the size government we have, taxes aren't high enough (we're not taking enough money out). So for this right size government, taxes are the thermostat on the wall. They're not there to balance a budget, to bring in money. We're just changing numbers down, we're changing numbers up. The deficit is a residual. You find out afterwards if it was a right size deficit by counting the bodies in the unemployment line. Not by worrying about 'paying it back' or 'becoming Greece' and all that nonsense -- there is no such thing.
So your question now is "why can't the political process get us there?" And now that you know all this, I'm going to ask you for the answer. Because it's becoming more of a mystery every day. Because the more people I know who know the right answer.... you know, it's almost like the less willing they are. I talked for hours to Senator Blumenthal who read my book Seven Deadly Innocent Frauds (you get it free online, it's an easy read). And he gets the whole thing and he won't do anything -- just sits there. Same with Lieberman from Connecticut (I ran for Senate from Connecticut a couple years ago). Talked to these people, I talked to Hollen, I talked to all kinds of people over the years... and they're not going to be the ones to move us off the dime on this. We've got the academic community starting to get some of the right answers and through the blogs. And it's called mmt: modern monetary theory (somebody gave it a name, wouldn't be the name we chose). It's been expanding rapidly. But it's not there yet: that the only thing between us and full employment and prosperity beyond what anyone can imagine, is the space between our ears. There's nothing else in the way right now: there's no food shortage, there's no shortage of housing, we have surpluses of everything.
Kelton: Warren, remember. I won't say who it was, but Warren and I met with a member of Congress together. And we went through all of this with this person, and when we got done, this person looked at us and said "I can't say that". Not "I don't believe that", "I disagree with that", "you're wrong", "you're crazy" -- "I can't say that"! We have to make it increasingly safe for these folks to say that, to take these positions. And wasn't it FDR who said 'I can't do things, you have to make me do things'.
Mosler: And this is pro-agenda for all of them. The Republicans would love to cut taxes and not have to cut spending. They could agree to that. But they can't...if they cut taxes, they've got to cut spending even more because they think they have to balance the budget, so they don't even do their own tax cuts. Democrats would like to increase spending.
LateMechanic
11mo ago
Remember that weird moment when Colbert announced that Comey had been fired by Trump? The audience cheered, before being corrected by Colbert that Comey was now a good guy and was to be lionized if you're anti-Trump (the updated narrative which went on for the next month or so in the media).
So it potentially helps Elon to some extent, to make a more dramatic break from Trump with big WWF promos cut from both of them. It depends on how the media plays it, but this could be the same kind of whiplash that erases a fair amount of elon derangement among democrats and lets him slip out of washington with a bit more independent posture intact.
LateMechanic
11mo ago
There's a clear different memetic impact depending on whether people mentally bucketed covid as 'a new potentially-deadly virus' or 'a new strain of the flu', so that was always an important territory to fight over.
LateMechanic
1yr ago
Similar to how the best way to use Reddit is to find actually smart people and then follow their entire post histories.
I used to do that, but my mistake was thinking SlateStarCodex must have been some MMO people were playing like Eve Online or something, so I skipped past those posts, and ended up finding the motte group way later than I should have.
LateMechanic
1yr ago
Yeah my experience whether on or off keto was that sucralose & sugar alcohols didn't disrupt my hunger/satiation. And I thought as of maybe 10+ years ago, the story was that while each of the artificial sweeteners have slightly different results with different people, they all had extremely low metabolic response compared to dietary carbs in general. The idea of your body being 'tricked' into producing a flood of insulin by the apparent encountered sweetness seems like some kind of psychological intuition that some people may find useful, but that wasn't backed by evidence.
And it's crazy to hear dentists saying 'luckily you're not a soda drinker' when looking at perfect teeth, whenever I'm drinking an impressively expensive amount of energy drinks instead of coffee.
LateMechanic
1yr ago
Interesting, thanks. Yeah the wiki article on Reconstruction era referred to "the legal, social, and political challenges of the abolition of slavery and the reintegration of the eleven former Confederate States into the United States" and various laws & amendments being passed nationally, which sounded like what I remembered. But what stood out was looking up what marked the end, the supposed compromise of 1877, simply being when federal troops were pulled out (so it was all an 'era' characterized by gunpoint).
Union imposed governments were incompetent, corrupt, and full of radicals who didn’t particularly care how their ideas worked in practice.
That's the wild part to me, which I somehow never learned or got through osmosis. I always had the connotation of 'carpetbagger' as economic opportunist, northern capitalists coming down to make a buck, a la 'shock doctrine'. Never knew that apparently northern white & black republicans literally went south and became congressmen & governors for a decade. The people who would actually pack up and move to a southern city to try to run/organize politics and government -- that's a mindset I'd also like to see portrayed from the flipside. If it was something other than a naked power grab, I could imagine it positively portrayed as a moral SJW angle, a 'doing my part' missionary flavor, or a more general entrepreneurial spirit.
Much less is known about the first wave of the klan but vigilantism has a long history in the south
I was wondering if maybe in the initial wave they were trying to imitate the crusades with the outfits and talk of wizards & knights. Then the revival in the 20s after this movie came out seems a lot more like a fanclub secret society, either larping or wanting more agency of 'you can just do stuff'. Admittedly, the movie poster artwork does look fairly badass, and makes me want to play dark souls or something.
LateMechanic
1yr ago
I just watched The Birth of a Nation (1915). Despite having a shredded attention span for movies typically, I found it pretty compelling and surprisingly watched it in just a few sittings (same thing I found with the Napoleon silent epic from the 1920s which was even longer). Just great expressive acting, scored well, with a story that flowed at a solid pace (and from a perspective that I can imagine inhabiting, but hadn't seen before). And I can guess how especially impressive some of it was for the time. Though the actors playing mulatto characters were maybe hamming it up too much as the villains, and seemed like they thought they were in a different movie (or maybe the director really wanted to sell that angle).
Given our forum members here, does anyone know of any heterodox witchy takes about the KKK? Are most people fairly accurate in seeing them as shallow dumb racist terrorists, lashing out while hiding their identities in cowardice? Or is that more like history being written by winners, where there was actually more to engage with, some higher theory of mind, like what this movie is trying to portray (revenge, fighting back, or maybe even beyond that)? Back in the day I had the basic high school AP US history, but apparently everything between the civil war and the great depression didn't make a lasting impression, because I find myself really not knowing anything about reconstruction, 'radical republicans', etc. In general I find that time period pretty interesting & appealing, with Monet impressionism, Dostoevsky & Arthur Conan Doyle books, and post-civil-war-set Westerns being most interesting. Just have no idea about the US South vs North around then I guess.
Or failing that, does anyone have any movie recommendations in any similar vein? I used to think of silent movies being mostly slapstick comedies which weren't even that funny, but these two epics I mentioned were great. Or related to this movie in other ways, I tried watching Gone With the Wind and Triumph of the Will, but got bored of both after 10-20 minutes (will give them another shot at some point). The 2012 spielberg Lincoln movie was great too, for DDL acting, and it seems like the Tommy Lee Jones character was rehabilitating the similar character in Birth.
I'd sum this up in going back to the fundamental equation he presented: [(M-X) = (I-S) + (G-T)].
These NIPA I & S terms are probably some of the more pointlessly confusing things in macro econ. The whole thing is an identity because it starts with the basic concept: someone's spending ≡ someone's income, and then slices & dices that in various ways. The 'S' is not any colloquial version of savings, like your money in a bank account. It's "gross saving", which is a really bizarre terminology for income. Meanwhile in the usual national accounts equation, they cancel out the consumption spending & consumption income parts. So it ends up as I being non-consumption spending, and S being non-consumption income. (So even if you know this is 'spending' and 'income', the letters are literally flipped...very helpful).
In financial terms, (S-I) is the domestic private sector financial surplus. Green on this sectoral balances chart. (G-T) in red, the government deficit, is pretty clearly the 'source' of both the private sector surplus and the foreign sector financial surplus (M-X) (blue). So arranged more usefully, (G-T) ≡ (S-I) + (M-X). The foreign sector and the domestic private sector both want to earn more dollars than they spend, so the government ends up spending more dollars than they earn (aka net issuing new IOUs in the form of USD reserves/bonds/bills/notes/coins/whatever, which our households/businesses and the chinese both want to get our hands on).
I couldn't say what level of confusion Cochrane was on there, when he insinuated that the source of the government's deficit is partially the foreign sector's surplus. So in that chart, we're suggesting that if the blue goes to zero, our government won't be able to be in such a deficit? That's certainly a take. It just won't need or be forced to run such a deficit, and/or our green part of that chart will gobble up the extra dollars.
Tariffs are not likely to fix any of this. If we cut off all net trade, as the current tariffs seem to aim to do, this process will have to come to an end.
But how? The US will no longer be able to finance $1.3 trillion budget deficits from foreigners, and will have to do it from domestic savings. Or, it will have to cut $1.3 trillion of spending, or raise $1.3 trillion of durable tax revenue. Interest rates will spike, and that’s the point. Higher interest rates encourage domestic saving, and discourage budget deficits and corporate investment, to bring investment plus government spending back in line with savings.
Just more confusion from Cochrane coming from the NIPA "saving" term. It would sound pretty stupid if he got this right, and properly wrote "without foreigners having large net incomes, we'll have to finance the government deficit by our domestic private sector accepting larger net incomes". Homer Simpson indeed there.
edit a few hours later: I guess I was typical-minding and literally forgot that some people might be using a 'loanable funds' framework of how money and credit could be imagined to work (as if they're finite goods), such that deficit spending requires being 'financed' by borrowing someone else's pre-existing 'savings' that they're willing to lend. The chain of logic where current accounts deficits disappearing leads to problems is still confused in multiple ways, but I guess it wasn't necessarily a confusion just from the national accounts 'S' term.
Even after the market didn't 'plummet' and just went sideways monday & tuesday, some basic news aggregators like yahoo news (don't ask, I'm masochistic and want to see what is being pushed to normie boomers) kept that Reuters article about futures from sunday on the front page for days, just because the headline was so juicy for them as anti-trump fuel, and it seemed like it was applicable at any point in time. People have given some reasonable pushback and alternative explanations, but you're also not wrong here.
And why does this require price effects, demand elasticity, and asterisks in the formula?
I don't think it does. The substack you linked posited that trump's team are smooth-brains because they canceled out those potential elasticity terms, and are literally just setting tariffs based on the pure trade deficit.
Why must it be currency devaluation, rather than comparative advantage?
Well the currency saving aspect is what makes it not really a truly free floating exchange rate (whether their intentions are to manipulate or not). It can be a bit messier in the real world, but the pure logical premise of a floating exchange rate is that if one side is exporting more than the other, then their currency is going to appreciate (more buy-pressure on their currency in the foreign exchange market and more sell-pressure on the net-importing country's currency). And eventually that prices their exports out of competitiveness, and/or makes the import-country's exports such a value that they start to out-compete, until the imbalance disappears.
Just googling for a basic source, here's an old paper from 1982 that explains the logic & evidence pretty well:
The great advantage of floating exchange rates is that the exchange rate adjusts to equilibrate a country's balance of payments. Domestic economic policy can be used to promote full employment or to maintain stable prices.
[...]
An appreciation of the U.S. dollar puts U.S. exporters at a disadvantage in world markets and forces domestic producers to compete with cheaper imports. In 1971, for the first time since 1873, the United States had a merchandise-trade deficit. Since 1971, the merchandise-trade balance has been in surplus in only 2 years. Despite the large recent deficits, the U.S. current-account balance has tended to fluctuate around zero, because of the strong performance of the services account.
[...]
Under fixed exchange rates, reserve assets and government bonds are used to finance balance-of-payments deficits. In the case of a deficit, such financing can go on only as long as the reserve assets last or as long as foreign countries are willing to accept the IOU's of the deficit country. In the case of a surplus, such financing can go on as long as the surplus nation is willing to accumulate reserve assets and claims on foreign countries.
I would think it to be impossible to run sustained trade surpluses against another country, without simultaneously saving in their foreign currency. But I'd be interested if I'm wrong in that.
LateMechanic
1yr ago
And what's the deal with "Critical Trade Theory?" Are trade deficits a good way to measure non-tariff trade barriers?
The premise must be that it's not really possible to calculate 'average' tariff levels, or the counterfactual amount of trade reduced by tariffs, as people were discussing here in a thread a few days ago. So they're just agnostically looking at the trade deficit level, and saying, if we have free floating exchange rates as the supposed global order post-bretton woods, this is supposed to (roughly) balance out naturally over time to equilibrate everyone's imports and exports. When a country sells more to the US than it buys from the US, that should push up their currency's value and push down the dollar, until the exports/imports from each are competitive with each other again.
If that trade balance doesn't (roughly) happen, it must be because the net-exporting country is devaluing their own currency against that of the net-importer country, by earning/buying the other currency and sitting on it. The positive ways of describing this are like "switzerland is fortifying their stockpile of foreign reserves as part of their monetary policy plan", or more neutrally "china is adjusting their target USD peg". The negative description would be "currency manipulation", which is what the trump team wrote in fine print on their big mathy chart that's being goofed on. Foreign holdings (may be a better chart somewhere) of USD reserves & treasuries is not the naive gut explanation "peasants lending money to the US", it's rather them buying & saving in our currency which happens to push on the exchange rate and make their exports more competitive in the US.
At the macro level, in 'real' terms of trade: your pile of goods & services that your country gets to enjoy are everything your domestic economy can create, plus everything you can import, minus anything you have to export. Exports are a real cost, where your country takes time/effort/materials to make something that someone else gets to enjoy. So we should all hope to be so lucky that anyone targets our country for their currency devaluing, allowing us to import more without paying for it with real exports. But that's at the macro national level. There are real losers on the micro level, like anyone trying to run an export business (who doesn't care at all who they sell their products to). Exporters can be very powerful & politically dominant in other countries, and maybe that's where we find Trump now, influenced by manufacturing business leaders (or trying to court/help their workers). Then there are also other potential motivations for going against the obvious economic benefit of maximizing import value, like the intangible value of maintaining a national manufacturing capability.
It surely depends on the government debt to gdp ratio. But yeah interest spending is government spending like any other, so turning on the fire hose and blasting people with free money is probably more stimulative than high borrowing costs are constrictive. You would have to think the propensity to spend interest income is near 0 to think otherwise. I don't know if that's the same reasoning as neo-fisherians use, or what erdogan is working from.
I'm not up to date with milei either, though I like his chainsaw schtick. If it was his policy to cut rates, the 10-year charts are pretty striking: interest rate, inflation rate. The last I had heard was years ago, that argentina was probably accidentally making their inflation worse by following the orthodox advice of raising rates. It wasn't until yesterday that I looked this up and saw the cut rates preceding the inflation drop.
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